27 September 2013

News Trading on the Flow

This activity, news trading, is not the first trade I ever made. That was me going by the book, doing a demo trade, seeing my trade going well then hopping into live on that trade. But news trading was the first sense of going with the market in forex. By necessity, because the way the market moves, is determined at the time of release, to the extent that forex can ever be determined.

Even so, the market as is well known, can react in contrarian ways to news. For me, this was the perfect news trade. FOMC, around say 2:12pm EST, or a little before (when it was released at 2:15pm) placing a position on:

a) either a belief based on analysis of some kind in what the news would be and its effect on value. b) what I was seeing in the quiet time just before the pair goes highly volatile.

This is the nice time, in some sense, because the market is so still. This assumes that such a quiet time will exist. But it has had a tendency to do so. I worked on the assumption sometimes that what the direction which was still in this stillness, would point to the actual direction, post volatility. The problem with this, is that the volatility can extend. In fact I note in more recent times that pairs can oscillate wildly for a relatively extended time.

The issue with this, is if one trades on this market, it become difficult to tell if a move is a reaction or simply an oscillation. That is, a move lacking reflective order, if I can put it like that: it moves because it moves, not because it had just moved. If I would differentiate EUR/USD from NZD/USD I would say that EUR/USD can do this, perhaps tends to do this, but with more order than NZD/USD.

That is: if there is a clear move, even with an initial feint opposite, EUR/USD may respect regions of support/resistance in its main move, in a more constrained way than NZD/USD. An interesting issue, is to what extent EUR/USD may conform more to NZD/USD.

But one needs an entry point. To enter on the fly, is problematic because there is indeterminacy in:

a) the direction b) the time in that direction

But the thing about this, is that it points to a reality of forex, at all times. But at least in news trading, you know this. But what does that mean. It means:

a) an appreciation of risk: that is, not risk, is a tiny set of possibilities. But it is entirely on this that one relies. It is like relying on a ladder, where one step is good, and not being sure where that step is. So the belief in intuition is being able to know where it is, and gingerly stepping on the other steps. And assuming still that this will be safe.

The risk is all those other things. So it points to issues with trading again and again on patterns in general, actually the set of possibilities is much wider than that set of trades. So in news reactions, is forex in the raw. And in any opportunity, is what opportunity in forex is. What it is, is a mixture of various factors. For example, luck in the draw (not even about getting the analysis right and the pair conforming but entering at the right time in the right way).

It is finding a set of possibly inputs from a large set of possible inputs. Now this is not saying that one chooses an outcome from a set of possible outcomes, it is rather that one chooses that outcome, then chooses from a set of variations on that outcome. To prune this, to make it feasible, one tries and enter on the fly and pick your set from there.

That is, one is not embracing risk, one is trying to deal with it, by letting the market prune it for one. The assumption that an early move in the short still time points to a direction is not sufficient, though, as one is assuming that the move is going to be contrary to this, but one does not know for how long and how many oscillatory moves there will be.

A less positive kind of environment is one where there is just a slightly shorter time in between oscillations, and I have noted this in the year before in USD/JPY (it becomes like a market at the top of a trend). Better is a classic extended time, respecting levels, thus allowing you to exit. By extended I mean a matter of minutes or less. But what engenders this.

It tends to be, from what I have seen, when one gets the news in jobs reasonably correct, contrary to the expectation. But obviously the risk that is trading off for the niceness of the trade, is most considerable. The market gives you potentially relative perfection, at the cost of going well out on a limb. Such moves may stall, and the question then arises to continue in, for a further rise, or exit here.

If there is one possible regularity in news trading, it is the stall after a strong move, possibly at a support/resistance level but the question becomes does it continue, stay flat or reverse (always a question to ask in forex). Or the question becomes: don't ask that question and see it as an end point to the trade, no matter what.

The question I ask is what turns this sharp reaction into a surge. Because the stall at the first resistance visible on the 1 min chart, can look similar. And note that that stall can turn into a reverse. In terms of the surge it may be something to do with the capacity to push through support/resistance and the bank of valuation possibility consistent with the direction taken: that is how much potential to move exists.

Partly this is also the extent to which the news is contrary to expectations. Bear in mind, that expectations tend to place the pair prior to news and the valuation potential is related to this and to how much the valuation is consistent with expectation.

Note as well that a strong FOMC reaction may be followed by a weak jobs report reaction. That is, one gets apparently complex results, but what might one expect within a rush of money flow. Yet there does seem to be some kind of structuring. It is like the huge money flow highlights, rather than washes away.